I am in an iPhone mood. Just like the rest of the world. It will go away, I promise. Last week I tried to answer a more fundamental question: Should you build an iPhone app? Now that you built one: how would you price your iPhone application?
Here are some interesting statistics: based on Tech Crunch’s mid day iPhone App Store download statistics from Friday, the top 10 free apps had a total of 68,452 downloads where the paid ones (mainly games) got a total of 4,484 downloads. It means that only 1 of 15 downloaded app was a paid one. I suspect the overall numbers are even lower. Why? The ratio between the number one paid app (Monkey Ball) and the number one free app (Remote) is about 1 paid to 9 unpaid. If you look at the last apps in the top ten list the ratio is now 1 to 25- which means that the longer the tail is, the more unlikely you are to make money on your app.
So what? It is clear that people prefer free for paid. As I mentioned in a previous post, a chapter in Dan Ariely’s book, Predictably Irrational is dedicated just for that. According to Ariely, when people were presented with two options, one free and the other not, they always selected free, even if it meant getting a lesser product. Dan even tried to minimize the disturbance of paying by adding the Lindt truffle to your lunch check but people still preferred free. Get this, when Hershey kiss was priced for 1 cent and Lindt for 15 cents, people picked Lindt in a ratio bigger than 2:1. When Hershy was offered for free and Lindt for 14 cents (same 14 cent difference) people selected Hershey in 2:1 ratio. This is how powerful free is.
So, according to this tested human behavior, people would always rather getting their apps for free, even if the priceis going to be very low. Nevertheless, experts anticipated that it will be different with the iPhone app store since Apple already proved that it could educate the market to pay for songs and movies instead of stealing them. In my opinion, it worked because it was easier to click buy now and pay 99 cents than going to your favorite file sharing site, look for the song, take 10 minutes to download it and import it to iTunes (and felt bad throughout the process…) . The tight integration made buying a song a no brainer.
But when customers will face two options: tightly integrated free app or tightly integrated paid app, both offer the same download experience – the first day statistics and Ariely’s research indicate that the vast majority will go for the free option, even if they will get a lesser app.
What does it mean? unless you are sure you can produce a massive hit, go for a free option and build a loyal install base you can market to in the future. Since the cost of development is so low and there is no distribution friction, most developers should seriously consider the free route and find a way to monetize the application based on something else (user data, commerce options etc). If you do price your app, be very careful with a low fee- it seems like one dollar apps will be way less popular than the free ones but will get little revenue. With a special enough application, that solves a unique problem of a relevant target market you may be able to charge enough and make it work for all sides.
Now, I may be completely wrong- Apple proved smarter people than me wrong in the past. Even in this case I would still suggest following the trends in the store, reading Dan’s book or the research paper and make sure you put a lot of thought into your pricing startegy. Good luck.
Update July 15: As posted in Tech Crunch today, there is a trend of increased number of paid application compared to free. The statistics refer only to the total number of applications and not to the number of downloads/popularity but they reflect on the fact that developers are optimistic about their ability to generate revenue selling apps. Jury is out…
Related article: Apple destroys iPhone apps credibility
Gadi Shamia 
I enjoyed your analysis. But I believe that one of your premises is slightly off the mark.
You referred to buying music on iTunes for 99 cents and suggested that people were willing to pay the 99 cents even though they could get it for free because “it was easier to click buy now and pay 99 cents than going to your favorite file sharing site” and wasting time and effort to obtain the same results.
You then postulated that purchases at the App store were different because it was just as easy to obtain the free option as it was to obtain the paid option.
I wanted to point out one other difference between the two scenarios. With the App store both the paid and the free copy are legitimate purchases. In your music scenario, the paid for music was legitimate while the free option involved piracy. People are willing to pay a reasonable amount to remain honest. This strong incentive is absent in the App Store scenarios. Both the paid and the free options are perfectly moral.
Question: Have you explored the idea of simultaneously releasing a free demo version and a for pay premium version of an application?
Falkirk- you are making a great point. The iTunes 99 cents also paid for the feel good of buying legal music (although the many millions downloading illegal music never felt like criminals…)
To your question: my guess is that demos would not do very well in the app store environment (unless they are time limited versions of paid app – what will make people consume them as “paid”. With so many apps to chose from, people will vote for immediate gratification with an app they can start using today and not worry about in the future.
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I am currently learning how to write an iPhone application. I know literally nothing about objective C, but I’ve written programs before in many other languages so I don’t think it will be that difficult to learn.
The application I have in mind is a utility, the likes of which do not yet exist for the iPhone so I will be breaking new ground and actually adding functionality to the iPhone that does not yet exist.
Based on my expected program demand I am planning on selling my app on the app store for 99 cents. I feel that it’s the best price for a first-time programmer getting his first app out there and just a little money in the process. The money is really secondary to my desire to have this functionality on my iPhone, but it is the more motivating factor to get my application completed and published. Not only that, but if I make 100 bucks off this application it will pay for the cost of joining the iPhone developer program, and any other applications I develop in the future will have no cost to me.
You talk about monetizing through other means rather than charging for the app directly but as an iPhone user I don’t see how any of the free apps so far could be making money this way. Am I missing something or do you have some examples of free apps that monetize in some other way?
Gadi, has anyone give much thought to what it costs to market a free app vs. a paid app? This applies to an iPhone app or any other platform application. Has anyone seen any analysis on the cost to market a free app vs a paid app? My hypothesis is that a free app would be cheaper because, possible along the same lines as the ratio of free to paid app downloads, 1 to 15.
I am not sure there is a publicly available analysis. In my humble opinion, by giving apps for free marketers are reducing huge friction in the sales process. if you imagine that the cost of sales and marketing are the sum of all frictions in the process (visibility, interest and all the to paying and usage), paying is most probably the biggest friction point once you have an interested customer. remove it and you can most probably win 10X more consumers(depends on which product)which makes your cost of sales and marketing much cheaper…
More thoughts on “free” can be found here: http://blogs.zdnet.com/BTL/?p=11274
Thanks, I’ll check this out and probably blog about this topic in the future.
Don’t remember his name but the cool young man who invented the Ruby on Rails Web 2.0 platform lead a conference session where he was recorded as saying “..if you “know” you have a good product, don’t offer it for free!”
The Ruby on Rails organization is profitable and popular now. Still, Gadi and the Ruby on Rails founder are both right.
on my blog I published an article titled
“New Google G1 Cell Phone Offers Black Entrepreneurs Leverage”
url: http://aboutblackboston.wordpress.com/2008/10/08/new-google-g1-cell-phone-offers-black-entrepreneurs-leverage/
Of course, this is the case with everybody who knows some JAVA, not just black people.
Conversion is really what its all about, ain’t it?